Six takeaways from proposed FATCA rules

The proposed rules issued by the US Treasury Department and the IRS have provided Foreign financial institutions with much needed guidance on the requirements and implications to their operations, helping them as they continue with their impact assessments and implementation efforts, according to Anthony Fantasia, tax partner with Deloitte & Touche in the Cayman Islands.  

The US Treasury Department and the Internal Revenue Service recently released nearly 400 pages of proposed regulations that detail their plans to implement the Foreign Account Tax Compliance Act, which becomes effective on 1 January, 2013. The proposed rules are intended to prevent US taxpayers who hold financial assets in non-US financial institutions and other offshore accounts from avoiding their tax payment obligations. 

Under FATCA, certain US financial institutions, foreign financial institutions and non-financial foreign entities are required to report information relating to offshore accounts and investments held by US taxpayers to the IRS annually. These institutions include banks, hedge funds, mutual funds, private equity firms, insurance, and real estate companies. In order to comply with FATCA, FFIs must enter into agreements with the IRS between 1 January, 2012, and 30 June, 2013. If they fail to enter into such agreements to report US accounts, they will face a 30 per cent withholding charge.  

As noted in the IRS’ press release on the proposed regulations issued 8 February, 2012, “FATCA strengthens US efforts to combat offshore noncompliance. In doing so, we understand it creates a significant undertaking for financial institutions,” said IRS Commissioner Doug Shulman. “Today’s proposed regulations reflect our commitment to take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law.” 

Deloitte’s Global FATCA Project Management Office has taken an early look at the proposed rules and identified six points that top financial services executives should likely consider before diving deeper into these new regulations.  


The rules simplify due diligence procedures for certain accounts. 

The US Treasury Department has modified due diligence procedures around pre-existing accounts to permit FFIs to rely on electronic searches for accounts ranging from US$50,000 to US$1 million. For accounts with a balance of more than US$1 million, FFIs will have to do paper searches that would be limited to documentation, current account files and certain correspondence. FFIs would also be required to question any relationship managers associated with these accounts to confirm that they don’t have any knowledge that the client is a US person. Searches are not required for accounts of less than US$50,000 or for certain insurance contracts or entity accounts of less than US$250,000. In many cases, including most instances of new account onboarding, banks would be able to rely on know your customer and anti-money laundering rules they already have in place. 


The rules provide some relief around reporting. 

The proposed rules give FFIs additional time to make adjustments to their systems for reporting US income. Through 2014, FFIs would only have to provide identifying information (eg name, address, taxpayer identifying number and account number) and the account balance or value of the US accounts. Beginning in 2016, they will be required to report income. By 2017, the full transactional reporting will be required. 


US Treasury has extended the period for “grandfathered” obligations. 

The proposed rules extend the grandfathered period for certain obligations, such as debt securities, that would be exempt from the FATCA withholding tax requirement. The period has been extended to 1 January, 2013. This means that any obligation issued by an entity before this date would not be subject to the withholding requirement as long as the terms of the obligation have not been materially modified. Previously, obligations issued before 18 March, 2012, would not have been subject to the requirement. 


The rules give members of expanded affiliated groups more time to comply. 

These rules would add a three-year transition period to the expanded affiliated group requirement to comply with FATCA.  

The rules previously required that each FFI in an expanded affiliate group needed to sign up either as a participating or deemed compliant FFI in order for FFIs to be in compliance – meaning none could participate if even one affiliate could not satisfy the requirement.  

The new rules now provide additional time for affiliates that are in restricted countries to enter into agreements. However, restricted FFIs will still have to go through due diligence requirements with respect to their accounts. And if they receive “withholdable” payments, then they will be subject to withholding during this transition period. 


US enlists help from five European Union nations on tax evasion.  

At the same time the US Treasury released the proposed rules, the United States announced an agreement with five European governments to help combat tax evasion. France, Germany, Italy, Spain and the United Kingdom said they would jointly develop a framework to collect and send information about offshore accounts held by Americans from their banks to the IRS. Once the framework is finalised, banks in those countries would not have to enter into separate agreements with the IRS. In return, the United States would collect and share information with those five countries about accounts held by their citizens in US financial institutions. However, financial institutions in other countries must still enter into agreements with the IRS on their own. 


These are proposed regulations, not final ones. 

The rules released by the US Treasury Department and IRS are not yet finalised. Industry can still submit written or electronic comments to the Treasury Department and IRS by 30 April. A public hearing is scheduled for 15 May, 2012. 


The author Anthony Fantasia is a partner with Deloitte & Touche in the Cayman Islands.